VAT and Investment Management Following the Deutsche Bank Case

07/11/2012

In July of this year the Court of Justice of the European Union released its decision in the case of Deutsche Bank (case C-44/11).

The Court held, as expected, that discretionary investment management services do not fall within either the exemption for broking services or the exemption for the management of special investment funds and are therefore subject to VAT. More controversially, however, the Court also ruled that the buying and selling of securities for the client should be treated as part of a single supply, even if charged for separately. In the UK, investment management fees are already taxable but dealing charges are usually accepted as exempt where the contract provides for them to be charged separately. This is now under threat and HMRC have begun consulting on a change of policy.

HMRC accept, notwithstanding the Court’s findings, that investment management and similar services (such as ‘advisory broking’) are not incapable of being two supplies and are looking for help in determining where to draw the line.

There are several factors which may be seen as indicating separate supplies of advice and dealing. Separate charging is one such factor, but in future will probably not be sufficient, on its own, to justify a different VAT treatment. As many observers have noted, the typical arrangements in the UK can be distinguished from the facts in the case: the bank charged 1.2% of the portfolio for investment management and a flat 0.6% of the portfolio for dealing, whereas most dealing charges in the UK are based on the transaction value. However, the Court said clearly that in a discretionary management service the dealing and advisory elements are so closely interwoven as to form an indivisible whole and for that reason the service should be seen as a single supply for VAT purposes.

In other words, the decision was based on the nature of the services and not on the charging structure. Viewed in this light, it is understandable that HMRC feel the need to tighten their policy. In the writer’s opinion, the correct approach should be to look at the whole arrangement, with the most important factor being the nature of the service (or services) that the client is signing up for. Going forward, a typical discretionary management service will almost certainly have to be treated as a single, taxable supply; so where that, in essence, is what the client is buying into there is probably little hope of preserving exemption for the dealing element of the service. However, it is not clear, at this stage, whether the single taxable supply treatment must be applied to other forms of investment services. For example, if the client is a ‘professional’ investor who expects to have a say in investment decisions, the contract may be on an ‘advisory managed’ or ‘advisory broking’ basis which could be differentiated from the facts in the DB case. HMRC will however be concerned that applying a different VAT treatment in such cases would raise questions as to unfair competition.

Some scope for exemption will remain where services can be shown to be separate, especially if they are provided by a third party (e.g. an external broker or custodian) who has his own contractual relationship with the client; but where such services are bought in at the sole discretion of the investment manager they will most likely be seen as ‘cost components’ of his supply to the client.

The VAT legislation itself is not changing, so the exemption for the management of OEICs and similar collective investment schemes is not affected; nor is the intermediary exemption, which covers any charge for arranging a client’s investment in such schemes. The change of policy may therefore have little or no impact on smaller or ‘retail’ investors.

What next?

HMRC have confirmed that there will be no retrospective changes. They are seeking input from interested parties by the end of October and will then issue a Business Brief; any changes will take effect from a date to be announced in 2013. In the meantime, investment managers should be reviewing their client terms and conditions and considering the effect of a change of VAT treatment.

This article was written by guest author Martin Sharrat, Head of VAT at Smith and Williamson.